Coffee, Coinstar (CSTR)? Really?
The company behind the namesake machines that swap pocket change for gift certificates is now turning its attention to coffee.
Coinstar has struck a deal with Seattle's Best -- the value-focused java subsidiary owned by Starbucks (SBUX) -- to begin rolling out kiosks that crank out cups of coffee for as little as a buck.
It may seem like a great idea on paper, but we've seen machines vending coffee for decades. You won't find too many fans raving about the quality of the hot beverage they just bought out of a machine. Coinstar explains that its system will grind fresh beans and brew them, so the quality should be better than many of the earlier java vending solutions. It will still have a hurdle to clear in getting jaded and hurried customers to accept coffee vending machines.
Coinstar expects to roll out 500 of these Rubi machines by the end of the year, with plans for as many as 15,000 coffee-making kiosks if the idea takes off.
There's a Latte Things Going on at Coinstar
There's a lot on Coinstar's plate these days. Its biggest business isn't the coin-counting machines. Redbox -- with its popular kiosks that offer DVD, Blu-ray, and video game rentals for as little as $1.20 a day -- is the real driver these days.
The 36,800 Redbox machines accounted for $502.9 million of the $568.2 million in revenue that Coinstar recorded in its most recent quarter.
The flip side to that argument is why investors shouldn't get carried away with Rubi's potential. There are 20,200 Coinstar coin-collecting automatons out there, but that platform generated just $63 million in revenue for its latest quarter.
Will Rubi be as popular as Redbox or as largely ignored as that Coinstar machine collecting dust in front of the grocery store?
Sure, it may seem exciting to be able to suck down mochas and vanilla lattes without having to wait in line at Starbucks, but you have to wonder if Starbucks would have approved this deal if it thought there was any likelihood that it might cannibalize traffic at its stores.
In other words, it probably won't.
You also have to wonder if this will go over well at the supermarkets, convenience stores, and restaurants that sell brewed coffee of their own. It's one thing to invite in a Redbox kiosk. These companies don't want the hassle of managing DVD rentals, and Redbox is attractive because it means every renter has to go to a store to return the movie.
The same rules don't apply to coffee.
The Machines Are Taking Over
It's not just DVDs, coins, and now coffee cups in the company's arsenal. Coinstar also has smaller ventures that feature kiosks selling consumer electronics or accepting cellphone trade-ins.
Coinstar's attempts to diversify are noble, but this will be a very different company if and when DVD rentals begin to dry up. It's really just a matter of time. Redbox is experiencing growth right now, but that is largely at the expense of Blockbuster closing more of its stores and Netflix (NFLX) shedding customers on its DVD plans after its controversial rate hike last summer. Once the dust settles it will be harder for Redbox to grow; there will be less market share available to grab, and movies studios are holding back on new releases.
%Gallery-154016%Yes, several of the major studios have imposed 28-day windows, delaying the availability of their movies for weeks after they come out on DVD. Disney (DIS) became the latest company to hop on this trend. John Carter may have come out on Tuesday, but it won't be selling rental copies to Netflix or Redbox for another four weeks. If Netflix and Redbox want to offer the movies they will have to pay more for them through retail channels. Redbox may do this for the really popular new releases, but it's going to be more expensive.
Coinstar is well aware that the optical disc will eventually fade as a platform in this streaming age. It's teaming up with Verizon (VZ) to introduce an online video service later this year. However, Coinstar is late to that already crowded party.
Investors wanting to get in on Coinstar's heady growth are also late to a party that's likely to wind down in a year or two.
Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix and Disney. The Motley Fool owns shares of Starbucks, Walt Disney, and Netflix. Motley Fool newsletter services have recommended buying shares of Starbucks, Walt Disney, and Netflix, as well as writing covered calls on Starbucks.
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